Your appeal of a material supervisory determination was
decided by the Supervision Appeals Review Committee (“Committee”) of the
Federal Deposit Insurance Corporation on September 15, 1998. The committee
considered [Bank] (“Bank”) appeal of various conclusions of the February 10,
1998, joint Safety and Soundness examination. After careful review, we have
concluded that the examination findings relating to the assessment of
management, the effectiveness of the outstanding Memorandum of
Understanding, and the assigned composite rating are appropriate. The State
of Hawaii Division of Financial Institutions (“the State”) Commissioner Lynn
Y. Wakatsuki was provided a copy of your letter of appeal; she has responded
that the State concurs with the ratings and overall findings of the report
of examination.

We have given careful consideration to the issues raised
in your appeal letter dated July15, 1998. Although we have concluded that
the ratings and the overall findings of the report were accurately reflected
in the report, we do recognize the efforts taken by management since the
examination, particularly your submission of the “Informal Proposal” to
Regional Director Masa on April 20, 1998. The Strategic Plan and Profit Plan
included in that proposal require expanded discussion and corrected
financial data; however, we view these documents as an initial positive step
by management to address the criticisms noted in the examination report. We
hope you will continue and increase your efforts to correct deficiencies and
strengthen areas of identified weakness.

This appeal was reviewed separately from the proposed
enforcement action being considered. As stated in the April 4, 1995
Financial Institutions Letter entitled “Guidelines for Appealing Material
Supervisory Determinations”, decisions to initiate formal or informal
enforcement actions may not be appealed. Questions raised in the appeal
letter regarding the assessment of management were reviewed in the context
of the composite rating, management rating, and the assessment of
management’s efforts to comply with the Memorandum of Understanding as of
the examination date. We also noted your concern that the institution’s
minority status was not discussed or considered in the examination findings.
The Committee’s findings on these issues are presented below along with an
explanation of the reason for the decision.

Management Assessment and Rating
You appeal the examination report’s overall conclusions regarding board
oversight and management effectiveness, but dispute very few of the many
specific findings regarding management deficiencies. While information is
provided regarding the basis for the board’s approval of three credits which
were either adversely classified or listed as a concentration of credit, the
classification and listing of those credits is not appealed. You have
supplied substantial information regarding how “Realtor” operated for the
benefit of Bank. However, this does not eliminate the deficiency that was
cited in the examination report: management did not maintain records
documenting financial benefit to Bank resulting from Realtor’s activities or
the amount of the company’s expenses paid by Bank.

The examination report lists numerous management
weaknesses in addition to those you address in the appeal. Not disputed in
your appeal are criticisms regarding: credit administration weaknesses;
ineffective loan review; lack of a realistic and comprehensive budget;
failure to report to the board the high degree of interest rate risk and to
devise a strategy to lower that risk; absence of documented discussion and
notification to the board regarding the shift from core deposit funding to
short term borrowings; and inadequate monitoring and control of the
information systems conversion which resulted in Bank’s books being out of
balance for 16 months.

The examination report acknowledges that the Hawaiian
economy has been declining, but primarily attributes the deterioration in
Bank’s condition to poor management and board supervision. We believe the
extent and nature of the weaknesses cited in the report are significant and
they have contributed to the decline in Bank’s condition. This decline is
evidenced by Bank’s trend of increasing adversely classified assets and past
due loans, and deteriorating earnings. Even if favorable economic conditions
had resulted in overall satisfactory financial indicators despite the many
management deficiencies noted during the examination, it would still be
appropriate to detail those weaknesses in the examination report and to
consider them in assigning a management component rating.

The comments in your appeal regarding the influence of
Year 2000 matters on the assessment of management are noted. Since the
Committee has already separately considered and addressed management’s
response to Year 2000 concerns, we believe it is inappropriate to revisit
the issue in this appeal.

The Uniform Financial Institutions Rating System’s
definition of a management component rating of “4” includes the following
statement: “Problems and significant risks are inadequately identified,
measured, monitored, or controlled and require immediate action by the board
and management to preserve the soundness of the institution.” The Committee
believes the situation at … fits this definition; therefore, the management
component rating of “4” is accurate.

Compliance with the Outstanding
Memorandum of Understanding
In your appeal, you state that …has substantially complied with the
Memorandum of Understanding (“MOU”) and that the informal action has been
effective. Since the examination closed, Bank has taken some steps toward
complying with certain MOU provisions. However, per outstanding guidelines
on processing appeals, in determining whether the MOU was effective or not
at the time of the examination, we can only look to the institution’s
circumstances at that time, not several months later.

The primary disagreement regarding the MOU seems to stem
from differing interpretations of the first two provisions of the document.
These two provisions address board oversight/responsibilities and providing
for management that is qualified to restore the institution to sound
condition. You characterize these two provisions as being vague and
ambiguous, but you believe Bank should be considered to be in compliance
with them. The findings of the examination report clearly indicate Bank’s
board and senior management were not complying with the intent of the first
two provisions of the MOU because they failed to adequately supervise and
effectively manage the institution. This is evidenced by the numerous
management deficiencies cited in the examination report and referenced in
the previous section of this letter.

Compliance with the management provisions of the MOU is
key to achieving compliance with the remaining provisions and in determining
the effectiveness of the action. Bank’s declining financial condition and
extensive management weaknesses as noted in the examination report, it is
evident to the Committee that the MOU had not been effective and that the
examination report is accurate in reflecting that conclusion.

Composite Rating
You appeal the composite rating of “4”, but, other than the management
rating, do not dispute any component ratings. The examination report
reflects an institution with poor asset quality, deficit earnings, declining
capital, marginal liquidity, and substantial risk to an increase in interest
rates. The Committee believes the assigned component ratings accurately
reflect the examination findings and that those findings support a composite
“4” rating.

Minority-Owned Institution
Considerations
In addition to the objections noted above, the appeal letter also contends
that the report of examination is deficient because the institution’s
minority status and FDIC policies and procedures regarding minority-owned
institutions were not discussed and considered in the examination findings.
The absence of discussion of Bank’s minority status in the report of
examination is not an appealable issue under the aforementioned Guidelines
for Appealing Material Supervisory Determinations. Nevertheless, we are
sensitive to your concerns on this issue and wish to address the questions
you have raised regarding the supervision of minority institutions.

The appeal asks, in part, “…How is its examination of Bank
and its ROE different from a non-minority financial institution? How does
the ROE reflect a recognition and intent to implement said law and policy?”
The FDIC’s April 3, 1990 Policy Statement on Encouragement and Preservation
of Minority Ownership of Financial Institutions defines the role of the
Division of Supervision in encouraging and preserving minority institutions
in the “Discussion” section as follows:

One very effective method of preserving minority ownership
is to maintain the health of existing minority-owned depository
institutions. In this regard, DOS is committed to a program of regular
examination of all banks for which it has primary supervisory
responsibility. This examination program is intended to detect and to work
with management to correct deteriorating trends. Correction of any adverse trends in institutions normally is handled
through regular supervisory channels. In the event that management is
unable to effect correction because of a lack of resources or technical
expertise, DOS will provide assistance where practical. [Italics added for
emphasis]

The “Procedures” section of the policy statement further
clarifies that the Division of Supervision will help minority-owned
institutions in need of assistance primarily through the normal supervisory
process:

Through its normal supervision, the FDIC will be aware of
institutions in need of remedial or preventative attention. Field examiners
and regional office staff will make suggestions and offer assistance, which
an institution is free to accept. Institutions are also urged to make their
needs known to the regional directors who will do all they can to help.
[Italics added for emphasis]

The intent of the foregoing policy statement is not to
handle supervisory measures differently for a minority institution than for
a non-minority institution. The report of examination was not, and should
not be, prepared differently for the thrift because it is a minority
institution. The conclusions and concerns detailed throughout the report of
examination were not, and should not be, biased because an institution is,
or is not, a minority institution. Instead, the intent of the policy
statement is to assist minority-owned institutions, where practical, in
correcting deteriorating trends. Your institution has requested special
assistance in accordance with the policy statement on two separate
occasions, and the San Francisco Regional Office has honored your requests
by providing examiners to offer advice and make recommendations about
corrective measures needed to address the institution’s deficiencies.
Further requests for special assistance will be considered in light of the
institution’s particular circumstances.

In accordance with the Guidelines for Appealing Material
Supervisory Determinations, the scope of this review was limited to the
facts and circumstances that existed at the time of the examination; no
consideration was afforded any changes occurring after that date or to any
subsequent corrective action. However, the San Francisco Regional Office
will consider any such efforts in its determination of the proposed
supervisory response.

This determination is considered the Federal Deposit
Insurance Corporation’s final supervisory decision.

By direction of Supervision Appeals Review Committee of
the Federal Deposit Insurance Corporation.